Ambiguity effect
The ambiguity effect is a cognitive bias where decision making is affected by a lack of information, or "ambiguity". The effect implies that people tend to select options for which the probability of a favorable outcome is known, over an option for which the probability of a favorable outcome is unknown. The effect was first described by Daniel Ellsberg in 1961. As an example, consider a bucket containing 30 balls. The balls are colored red, black and white. Ten of the balls are red, and the remaining 20 are some combination of black and white, with all combinations of black and white being equally likely. In option X, drawing a red ball wins a person $100, and in option Y, drawing a black ball wins them $100. The probability of picking a winning ball is the same for both options X and Y. In option X, the probability of selecting a winning ball is 1 in 3 (10 red balls out of 30 total balls). In option Y, despite the fact that the number of black balls is uncertain, the probability of selecting a winning ball is also 1 in 3. This is because the number of black balls is equally distributed among all possibilities between 0 and 20, so the probability of there being (10 - n'') black balls is the same as there being (10 + ''n) black balls. The difference between the two options is that in option X, the probability of a favorable outcome is known, but in option Y, the probability of a favorable outcome is unknown ("ambiguous"). In spite of the equal probability of a favorable outcome, people have a greater tendency to select a ball under option X, where the probability of selecting a winning ball is perceived to be more certain. The uncertainty as to the number of black balls means that option Y tends to be viewed less favorably. Despite the fact that there could possibly be twice as many black balls as red balls, people tend not to want to take the opposing risk that there may be fewer than 10 black balls. The "ambiguity" behind option Y means that people tend to favor option X, even when the probability is equivalent. One possible explanation of the effect is that people have a rule of thumb (heuristic) to avoid options where information is missing (Frisch & Baron, 1988; Ritov & Baron, 1990). This will often lead them to seek out the missing information. In many cases, though, the information cannot be obtained. The effect is often the result of calling some particular missing piece of information to the person's attention. However, not all people act this way. In Wilkinson's Modes of Leadership, what he describes as Mode Four individuals do not require such disambiguation and actively look for ambiguity especially in business and other such situations where an advantage might be found. This response appears to be linked to an individuals understanding of complexity and the search for emergent properties. See also * Black swan theory * Choice under uncertainty * Prospect theory * Risk aversion References * Baron, J. (2000). Thinking and deciding (3d ed.). New York: Cambridge University Press. * Ellsberg, D. (1961). Risk, ambiguity, and the Savage axioms. Quarterly Journal of Economics, 75, 643–699. * Frisch, D., & Baron, J. (1988). Ambiguity and rationality. Journal of Behavioral Decision Making, 1, 149-157. * Ritov, I., & Baron, J. (1990). Reluctance to vaccinate: omission bias and ambiguity. Journal of Behavioral Decision Making, 3, 263-277. * Wilkinson, D.J. (2006). The Ambiguity Advantage: what great leaders are great at. London: Palgrave Macmillian. Category:Ambiguity Category:Cognitive biases